Aldrich Wealth’s Nicole Rice, Partner + Chief Growth Officer, and Darin Richards, Partner + Chief Investment Officer, share quarterly market commentary and insights—diving into Q2 2025 performance and what to expect in the quarters ahead.

The S&P 500 gained 10.9% in the second quarter of 2025, experiencing its best quarterly performance since late 2023 despite intra-quarter volatility stemming from a temporary tariff pause, a sharp escalation with China, and a partial truce late in the quarter. AI optimism and strong earnings helped fuel a sharp rebound in equities despite weaker consumer confidence and cautious corporate sentiment. Developed international markets, as measured by the MSCI EAFE, rose 11.8%, supported by currency tailwinds, rate cuts, and improving economic data in Europe and Japan. Emerging markets, as measured by the MSCI Emerging Markets Index, jumped 12.0%, driven by strong gains in Taiwan, South Korea, and Mexico, while China lagged amid trade tensions and mixed economic data. In fixed income, the Bloomberg US Universal Index increased by 1.4% as the yield curve steepened and markets priced in rate cuts later this year. Q1 gross domestic product (GDP) contracted for the first time since early 2022, though labor market data showed resilience and inflation eased. The Federal Reserve (Fed) held rates steady, with markets pricing in two cuts this year. Looking to the second half of 2025, unfolding trade policies will remain a key driver of market performance.

The S&P 500 grew 10.9% during the second quarter of 2025, notching its best quarter since Q4 2023. Performance was marked by volatility however, as the index declined over 20% from its February high post-Liberation Day, then recovered all its losses and more in the longest winning streak in over 20 years. Much of the turbulence can be attributed to evolving tariff and trade policies announced throughout the quarter. In April, President Trump announced a 90-day pause on tariffs for select countries, citing ongoing negotiations. Following this, the S&P marked its largest single-day gain since 2008. Sentiment quickly reversed, however, as the administration escalated the trade war with China, increasing tariffs to 145%. April saw the largest one-month drop in the trade deficit on record, as companies frontloaded inventories ahead of tariffs. Later in the quarter, the US and China agreed to a temporary suspension of most tariffs and a mutual reduction in remaining tariffs from 125% to 10%, bringing total tariffs on Chinese imports to 30%. Inflation came in lower than expected throughout the quarter as the inflationary impact of tariffs was delayed. Still, the Fed left interest rates unchanged and signaled a patient approach to assess how the evolving trade policy might influence inflation. Consumers felt the uncertainty throughout the quarter, with confidence dropping to the lowest level since the height of the pandemic in the first two months and spending softening. Later, sentiment began to show signs of recovery, with the University of Michigan Sentiment Index rising in June. Labor market conditions edged toward more normal levels, as job openings rose slightly, but private payroll additions came in well below expectations, pointing more to employer caution than a collapsing job market. Echoing this cautious tone, the highest number of S&P 500 companies since Q4 2022 cited “recession” on earnings calls during the quarter, underscoring the unease across corporate America despite strong headline index gains.

Eight of the 11 underlying sectors of the S&P 500 rose in Q2, but the spread between the leaders and laggards was considerable. Technology was the top performing sector, surging 23.7% amid AI optimism and strong earnings reports. Conversely, energy was the quarter’s worst performing sector, sliding 8.6%, thanks to a decline in oil prices and trade policy uncertainty.

Large cap stocks outperformed small cap stocks in the second quarter of the year. Reversing the trend from Q1, growth stocks outpaced value stocks as investor enthusiasm rotated back toward high-growth sectors, buoyed by rate cut expectations, and renewed optimism around AI and innovation-led earnings.

International developed markets, as measured by the MSCI EAFE Index, rose 11.8% during the second quarter, capturing an additional 7% from dollar depreciation. In the European Union (EU), newly announced US tariffs stirred volatility and raised concerns about economic resilience. Inflation fell below the European Central Bank’s (ECB) 2% target for the first time since September, driven by lower energy prices, though consumer expectations for future inflation rose amid lingering price stability concerns. Subsequently, the ECB cut rates for a seventh consecutive time to support growth. Still, the euro strengthened 9.0% against the dollar to a nearly four-year high. Q1 GDP data showed the eurozone economy outpaced the US, as American firms accelerated imports ahead of tariff implementation. During the quarter, the labor market remained steady, though hiring sentiment turned more cautious. Within the United Kingdom (UK), Q1 GDP growth exceeded expectations, but full-year forecasts were revised lower due to escalating trade tensions and ongoing fiscal constraints. Inflation eased modestly, prompting the Bank of England (BoE) to initiate a 25-basis-point rate cut, the first in what economists expect to be the fastest rate-cutting cycle since the 2008 financial crisis. Sentiment in the services sector, which makes up the largest share of the UK economy, dropped to a two-and-a-half-year low. Meanwhile, unemployment ticked higher, and elevated labor costs continued to pressure business conditions. In Japan, equities advanced as hopes for a trade agreement with the US and improving domestic activity supported sentiment. The yen strengthened more than 5% against the dollar, while inflation indicators showed mixed signals. Tokyo-area inflation (seen as a leading indicator for the country) rose to its highest level in over two years, but the Bank of Japan held rates steady and downgraded its growth outlook after Q1 GDP contracted by 0.7%. Manufacturing expanded for the first time in nearly a year, but employment rose at the fastest pace in almost twelve months.

Elsewhere, the MSCI Emerging Markets Index gained 12.0% over the second quarter of the year, with a majority of constituent countries posting double-digit gains. China was one of the weakest performers, finishing the quarter up 2.0%. Markets opened Q2 lower as the US imposed a 145% tariff on Chinese goods, prompting retaliatory measures from Beijing. The escalation weighed heavily on China’s export sector, leading to factory shutdowns, job losses, and subdued inflation data. In response to soft demand, the People’s Bank of China signaled potential interest rate cuts and reductions in bank reserve requirements to support growth later this year. Still, Q1 GDP showed modest growth, supported by front-loaded exports and targeted stimulus. Sentiment improved late in the quarter as both sides signaled willingness to negotiate, agreeing to pause new tariffs and maintain current levels during renewed talks. While manufacturing activity showed signs of stability, the services sector fell to a nine-month low, reflecting uneven momentum. Meanwhile, Taiwan and South Korea surged on strong global demand for AI chips, investor optimism around trade cooperation, and increased foreign inflows (up 26.1% and 32.7%, respectively). Mexico also rallied, climbing 20.5% during the quarter as investors looked for alternatives amid market volatility and the country benefited from more constructive trade discussions with the US.

Over the second quarter of 2025, the Bloomberg US Aggregate Index increased by 1.2% and the broader Bloomberg US Universal Index rose 1.4%. The yield curve steepened throughout the quarter, with shorter-term yields falling and longer-term yields rising amid trade tensions and the expectation for the Fed to cut rates in the second half of the year.

The yield on the 10-year US treasury ticked up 7 basis points during the quarter, ending at 4.24%. Short-duration yields, which are closely tied to Fed rate moves, fell and the 2-year treasury dipped 0.15% in Q2. Credit spreads tightened modestly as recession fears faded and investor sentiment improved amid easing trade tensions. Consequently, high yield bonds outperformed investment-grade counterparts, as investors took on additional risk in search of yield. Municipal bonds were the only fixed income segment to post a loss, pressured by elevated supply.

US GDP contracted at an annualized rate of 0.5% over the first quarter of 2025, the latest period for which data are available, marking the first negative quarter since Q1 2022. The decline was primarily driven by a surge in imports, as companies accelerated orders ahead of anticipated tariffs. During the quarter, the services sector contracted for the first time since mid-2024, reflecting softer consumer spending and delayed business hiring decisions amid ongoing policy uncertainty.

Labor market data released during the quarter pointed to a gradual normalization in conditions. April’s job report came in better than expected – slower than the prior month, but still enough to ease recession concerns. Later in the quarter, job openings rose modestly, but private payroll growth fell short of expectations, signaling employer caution more than broad weakness. Weekly jobless claims ticked higher, yet hiring slowed less than anticipated and the unemployment rate held steady, near historic lows, suggesting underlying resilience.

The Fed is facing a challenging backdrop it hasn’t encountered in nearly 50 years: a combination of rising tariffs, cooling growth, and inflationary pressures. Inflation eased throughout the quarter, with May’s Consumer Price Index (CPI) surprising to the downside as tariffs had yet to materially affect consumer prices. Still, longer-term inflation expectations surged to their highest level since 1981. The Fed held rates steady throughout the quarter and signaled a patient approach, emphasizing the need to assess how shifting trade policy might influence future inflation. Despite the Fed’s cautious tone, markets continued to price in two rate cuts by year-end, reflecting expectations that slowing growth may ultimately outweigh inflation concerns.

Markets enter the second half of the year with a cautiously optimistic tone. While the US economy showed signs of strain in Q1, recent data point to resilience beneath the surface, particularly in the labor market. The Fed’s patient stance and the easing of trade tensions have helped stabilize investor sentiment, though uncertainty remains around the longer-term inflation impact of tariffs. Despite underperforming in Q2, value-oriented and defensive sectors may regain traction if growth slows and inflation proves more persistent. Small caps face competing forces – less direct tariff exposure due to their domestic focus, but greater sensitivity to high interest rates and tighter credit conditions. Larger multinational companies may see pressure from trade disruptions, though their financial strength offers relative resilience.

Valuations in international markets continue to look attractive relative to US equities. Europe’s outlook has improved, supported by interest rate cuts, fiscal stimulus, and stronger-than-expected GDP growth, momentum that may persist if domestic demand continues to recover and tariff pressures ease. The strength of the euro and pound coupled with falling inflation could further attract capital and support corporate earnings in the second half of the year. In Japan, equities remain well-positioned, backed by ongoing governance reforms, steady earnings, and a stable policy backdrop. While geopolitical risks persist, international developed markets may offer a compelling relative opportunity as global growth stabilizes.

Emerging markets face an uneven landscape heading into the second half of the year. China’s path forward will depend largely on trade negotiations and the effectiveness of policy support, as recent stimulus efforts and a temporary tariff truce offer only partial relief. While structural challenges persist, renewed manufacturing activity and ongoing policy flexibility could help stabilize momentum. Elsewhere, economies like Taiwan and South Korea are poised to benefit from global demand for semiconductors and AI technologies, while Mexico may continue to attract capital as a relatively insulated trade partner. While currency appreciation has been a tailwind for emerging markets, ongoing volatility and evolving trade policy remain key risks to monitor in the months ahead.

Fixed income markets may remain sensitive in the coming months as inflation data, central bank messaging, and geopolitical developments continue to shape expectations. With the yield curve steepening modestly in Q2 and the Fed maintaining a wait-and-see stance, interest rate volatility is likely to persist. Credit spreads tightened during the quarter, reflecting improved sentiment, but could widen again if economic data weakens or trade risks resurface. High yield and emerging market debt may continue to outperform in a risk-on environment, while core bonds should continue to offer stability and income potential in diversified portfolios.

This information is for educational purposes and is the opinion of Aldrich Wealth LP (Aldrich Wealth). Facts and figures are believed to be from reliable sources, but no liability is accepted for any inaccuracies. Indices are unmanaged, unavailable for direct investment, and do not include any transaction, management or other fees or costs. Nothing in this commentary should be construed as an investment recommendation. Forward-looking statements reflect current views and are not guarantees of future performance. Past performance does not guarantee future results. All investments involve risk. Aldrich Wealth is an investment adviser registered with the US Securities and Exchange Commission.